R&D changes relating to SME R&D and the Research & Development Expenditure Credit (RDEC)

Following the Spring 2023 Budget, claimant companies will need to consider the impact of R&D reforms announced last week.

Change in relief rates from 1 April 2023

For profitable SMEs, the SME R&D relief rate is changing from 130% to 86%.

For loss making SMEs, the repayable SME R&D credit is changing from 14.5% to 10%.

For loss making R&D intensive SMEs, the cash R&D tax credit rate will remain at 14.5%.

R&D intensive SMEs are defined as having qualifying R&D expenditure that constitutes at least 40% of the company’s total expenditure, (the R&D expenditure and total expenditure of connected group companies will need to be aggregated when calculating this R&D ratio).

This change will apply from 1 April 2023 and will be legislated in Finance Bill 2023-24.  Eligible companies will need to apply by delaying submission of their claim until legislation has come into effect or by amending their submission until after legislation has come into effect.

These companies will need to indicate their status via an additional form which will be introduced from August 2023.

Finally, the Research & Development Expenditure Credit (RDEC) is increasing from 13% to 20%.

Additional Information requirements to apply to all claims made from 1 August 2023

A digital Additional Information Form will need to be submitted alongside all R&D claims submitted from 1 August 2023, regardless of the accounting period end of the claim.

The additional information required is substantial:

• each claim will have to be signed by a named senior officer of the claimant company
• claims must contain details of any agent who has advised the company on compiling the claim
• claims must contain a detailed description on the R&D project
• the claim must also include a breakdown of costs across categories

Finally, as previously announced, companies must inform HMRC of their intention to file a claim within six months from the end of the period to which the claim relates.

Notification of this kind will not be required where a company has claimed in one of the preceding three periods.

Extension of costs qualifying for R&D relief from 1 April 2023

As previously announced, R&D expenditure categories are  extended to include the costs of datasets and cloud computing.

R&D in pure mathematics will also qualify for relief and can form part of the qualifying R&D activities of the claimant from accounting periods beginning on or after 1 April 2023.

Overseas restrictions on R&D costs to come into effect from 1 April 2024

 This restriction, anticipated from 1 April 2023, has now been delayed until 1 April 2024.  This will allow the government to consider the interaction between this restriction and the design of a potential merged R&D relief which has been consulted on recently.

UK companies who currently claim R&D costs paid to overseas group companies or third parties may no longer be able to include these costs in their claims from 1 April 2024.  The costs of externally provided workers (EPWs) will be limited to work undertaken in the UK.

This means that claiming the costs of overseas based subcontractors will most likely not be possible.

Points to takeaway

Claimant companies should prepare for the above changes and be ready to provide the required information in time to meet compliance deadlines.

The staggered timing of the changes may mean additional planning is required.

For more detail:

Spring Budget 2023 — Overview of tax legislation and rates (OOTLAR)

Research and Development Tax relief reform changes

As always, there is plenty to consider and please do not hesitate to contact your usual Ward Williams contact should you wish to discuss any of the points noted above.